Final Section 987 regulations issued with significant new limitations on recognition of Section 987 losses

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December 2016


The Treasury and IRS issued final and temporary regulations under Section 987 on December 7, 2016.  The final regulations implement an accounting regime based largely on proposed regulations issued on September 6, 2006, to account for income earned through a qualified business unit (QBU) that operates with a functional currency different than that of its owner (Section 987 QBU).  

One significant feature of the new rules is that unrealized Section 987 gains and losses existing as of the transition date for the new regime will largely disappear under a mandatory ‘fresh start’ transition method.  The new temporary regulations also include significant new limitations on taxpayers’ ability to cause the recognition of Section 987 losses through terminations of QBUs.   These limitations can apply to terminations occurring on or after December 7, 2016, and apply to all entities that determine Section 987 gain or loss under Section 987(3), even those excluded from the scope of the final Section 987 regulations.  

Taken together, these provisions make it likely that much of the existing unrealized Section 987 losses of US-based multinationals will never be tax effected.  Because the US dollar is near historic highs against many currencies, these unrecognized Section 987 losses can be very large.  To the extent that companies have recorded a deferred tax asset on their financial statements with respect to such unrealized Section 987 losses, they may be required to reverse such amounts through continuing operations in the current quarter.

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Jeffrey Dorfman

Managing Director, PwC US

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